# Use tax return on home or car loan? **URL:** \ **Category:** In My Humble Opinion\ **Created:** [January 31, 2014, 8:00pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229 "2014-01-31T20:00:48Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Johnny\_L.A](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnny_l.a/32/1084_2.png) [@Johnny\_L.A](https://boards.straightdope.com/u/Johnny_L.A)\ **Post date:** [February 1, 2014, 6:50pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/21 "2014-02-01T18:50:32Z")
What is this ‘refund’ of which you speak? 😕 ---
**Author:** ![Amateur\_Barbarian](https://avatars.discourse-cdn.com/v4/letter/a/59ef9b/32.png) [@Amateur\_Barbarian](https://boards.straightdope.com/u/Amateur_Barbarian)\ **Post date:** [February 1, 2014, 7:05pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/22 "2014-02-01T19:05:51Z")
> [@JerrySTL](#): > > Do you have an outstanding balance on a credit card? That should be first. I’d agree, but the OP didn’t put that out as an option. > [@](#): > > After that I’d put it on the mortgage. While the interest rate may be lower on it, the interest payment is front loaded on such loans. Since you just started paying on it recently, I bet about 75% of your payment goes to interest. Paying down the principal now will save you a lot of money in the long run. You’ve got that sort of garbled. Regular payments follow the old “Rule of 12s” and on a mortgage go primarily to interest for a long, long time. However, most EXTRA payments are applied directly to principal reduction. As I’ve said twice… principal-reduction payments are NOT deductible the way mortgage interest payments are. Reducing the principal on a loan is good, but only if you you intend to pay on it for a long time; reducing the principal by 1% or so won’t affect the vast midrange of interest costs. The gain will be negligible if the mortgage is paid off in, say, 5-10 years (as most are in the course of home sale and moving). So the long-run, maximum return option is to pay down the mortgage and reap the benefits in 25-30 years, or the pay down the truck and see lesser benefits in the short term. (And then have theoretically extra funds for more mortgage paydown.) It’s just investment strategy in reverse. ---
**Author:** ![Deereman](https://avatars.discourse-cdn.com/v4/letter/d/a3d4f5/32.png) [@Deereman](https://boards.straightdope.com/u/Deereman)\ **Post date:** [February 2, 2014, 8:43pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/23 "2014-02-02T20:43:43Z")
Thanks for all the great opinions everybody. I’m glad I’m not the only one confused on which way would be best to go! To answer a couple questions, there is no PMI on the house loan, nor any outstanding credit card debt. I use them, but pay them off. I think I’m going to put it towards the truck. When I can that paid off, I’ll put extra towards the house. Don’t know if I can do that full amount every month, but I’ll do as much as I can! The truck payment makes things pretty tight. ---
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [February 3, 2014, 12:32am UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/24 "2014-02-03T00:32:25Z")
> [@Amateur\_Barbarian](#): > > Only in the narrow and already-discussed case of reducing the total interest cost over the life - and that’s _life_, not a few years - of the mortgage does applying the payment to the mortgage have significant financial value. Making a larger proportional move to pay off the truck, eliminate that interest cost, and (in theory) releasing funds to continue to apply to the mortgage makes by far the most sense over all… but little of it has any relationship to itemized deductions. Of course the extra payment goes to principal, and thus less deductible interest is paid over the lifetime of the loan. Even if the rates were the same, the OP is better off allocating the extra money toward the car if the mortgage interest is going to be deducted through the lifetime of the loan. ---
**Author:** ![elfkin477](https://avatars.discourse-cdn.com/v4/letter/e/a9a28c/32.png) [@elfkin477](https://boards.straightdope.com/u/elfkin477)\ **Post date:** [February 3, 2014, 2:03am UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/25 "2014-02-03T02:03:34Z")
> [@Deereman](#): > > Thanks for all the great opinions everybody. I’m glad I’m not the only one confused on which way would be best to go! > > To answer a couple questions, there is no PMI on the house loan, nor any outstanding credit card debt. I use them, but pay them off. > > I think I’m going to put it towards the truck. When I can that paid off, I’ll put extra towards the house. Don’t know if I can do that full amount every month, but I’ll do as much as I can! The truck payment makes things pretty tight. Since you’ve decided, mind if I piggyback onto your question? My refund will be in the neighborhood of $1,000. I have 13 more months on my car loan, and I’m hoping to buy a house before Christmas. Which makes more sense for someone who’ll be applying for a mortgage: paying down the car loan by that much to reduce debt, or having that much more as a potential down payment on the house? (any house I buy will very likely be between 125-175K, ftr, given my income and the local market) ---
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [February 3, 2014, 1:30pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/26 "2014-02-03T13:30:07Z")
It’s going to depend on additional variables. Do you have enough down payment to avoid PMI? What are the expected relative interest rates? Again, if you plan on diverting extra funds toward debt, it’s really easy to adjust your withholdings so that you can make those extra payments throughout the year instead of waiting for a refund. ---
**Author:** ![Munch](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/munch/32/5281_2.png) [@Munch](https://boards.straightdope.com/u/Munch)\ **Post date:** [February 3, 2014, 2:46pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/27 "2014-02-03T14:46:11Z")
> [@elfkin477](#): > > Which makes more sense for someone who’ll be applying for a mortgage: paying down the car loan by that much to reduce debt, or having that much more as a potential down payment on the house? (any house I buy will very likely be between 125-175K, ftr, given my income and the local market) In your situation, getting to the point where you don’t have to pay for PMI is far more important. You’ll gain that $1000 back pretty quickly by avoiding PMI. ---
**Author:** ![iamthewalrus\_3](https://avatars.discourse-cdn.com/v4/letter/i/258eb7/32.png) [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)\ **Post date:** [February 3, 2014, 6:12pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/28 "2014-02-03T18:12:57Z")
> [@Lasciel](#): > > I would like to agree with this. I was failing to explain to my mom the other day that it doesn’t help her to have ‘saved’ the money after her car is paid down, unless she puts that money toward paying something else off instead of going shopping. Sure it does. Presumably, she’s shopping for things she either needs or things that she wants and make her happy. It might not lead to more money in the end, but it should lead to _something_ positive. ---
**Author:** ![Amateur\_Barbarian](https://avatars.discourse-cdn.com/v4/letter/a/59ef9b/32.png) [@Amateur\_Barbarian](https://boards.straightdope.com/u/Amateur_Barbarian)\ **Post date:** [February 3, 2014, 6:24pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/29 "2014-02-03T18:24:56Z")
> [@iamthewalrus\_3](#): > > Presumably, she’s shopping for things she either needs or things that she wants and make her happy. > > It might not lead to more money in the end, but it should lead to _something_ positive. Which does not include spending money for its own sake. But never mind, I may as well have written that in Aramaic. ---
**Author:** ![Moonlitherial](https://avatars.discourse-cdn.com/v4/letter/m/4bbf92/32.png) [@Moonlitherial](https://boards.straightdope.com/u/Moonlitherial)\ **Post date:** [February 3, 2014, 6:26pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/30 "2014-02-03T18:26:55Z")
> [@Amateur\_Barbarian](#): > > The problem with this scheme is that it assumes a level of financial responsibility lacking in about 99% of the population. 🙂 > > In any case, putting the money against the truck loan is almost certainly the right move. I would like to point out the OP is already ahead of 90% of the population because he’s planning to put the money down on a debt instead of taking a vacation or putting a down payment on a boat. ---
**Author:** ![drewtwo99](https://avatars.discourse-cdn.com/v4/letter/d/d07c76/32.png) [@drewtwo99](https://boards.straightdope.com/u/drewtwo99)\ **Post date:** [February 3, 2014, 6:36pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/31 "2014-02-03T18:36:43Z")
> [@Moonlitherial](#): > > I would like to point out the OP is already ahead of 90% of the population because he’s planning to put the money down on a debt instead of taking a vacation or putting a down payment on a boat. And has no credit card debt. ---
**Author:** ![Amateur\_Barbarian](https://avatars.discourse-cdn.com/v4/letter/a/59ef9b/32.png) [@Amateur\_Barbarian](https://boards.straightdope.com/u/Amateur_Barbarian)\ **Post date:** [February 3, 2014, 6:37pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/32 "2014-02-03T18:37:58Z")
> [@Moonlitherial](#): > > I would like to point out the OP is already ahead of 90% of the population because he’s planning to put the money down on a debt instead of taking a vacation or putting a down payment on a boat. Absolutely, and he may even be in that vanishingly small percentage that follows through. But, like New Year’s resolutions to diet, exercise and cease vice-ing, such intended discipline rarely lasts very long. See prior post; finding ways to spend “extra” money makes you feel good and is thus positive and inarguable. :smack: ---
**Author:** ![Deereman](https://avatars.discourse-cdn.com/v4/letter/d/a3d4f5/32.png) [@Deereman](https://boards.straightdope.com/u/Deereman)\ **Post date:** [February 3, 2014, 7:05pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/33 "2014-02-03T19:05:12Z")
It was either use the refund for debt, or for meth. Was a hard choice but debt won out so I can afford more meth in the long term 😉 ---
**Author:** ![Deereman](https://avatars.discourse-cdn.com/v4/letter/d/a3d4f5/32.png) [@Deereman](https://boards.straightdope.com/u/Deereman)\ **Post date:** [February 3, 2014, 7:07pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/34 "2014-02-03T19:07:39Z")
> [@elfkin477](#): > > Since you’ve decided, mind if I piggyback onto your question? > > My refund will be in the neighborhood of $1,000. I have 13 more months on my car loan, and I’m hoping to buy a house before Christmas. Which makes more sense for someone who’ll be applying for a mortgage: paying down the car loan by that much to reduce debt, or having that much more as a potential down payment on the house? (any house I buy will very likely be between 125-175K, ftr, given my income and the local market) I would think save it for the down payment. You will still have the car debt at the time of applying for the loan, they’ll likely look at it as your payment per month, not how much you still owe total. Even if you pay extra now you’ll still have the same payment by their view…but I could be wrong. The whole thing is very confusing! ---
**Author:** ![Amateur\_Barbarian](https://avatars.discourse-cdn.com/v4/letter/a/59ef9b/32.png) [@Amateur\_Barbarian](https://boards.straightdope.com/u/Amateur_Barbarian)\ **Post date:** [February 3, 2014, 7:13pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/35 "2014-02-03T19:13:23Z")
> [@Deereman](#): > > It was either use the refund for debt, or for meth. Was a hard choice but debt won out so I can afford more meth in the long term 😉 Well, no, see, that’s wrong because if you’d invested the K in “Heisenberg blue” you’d really clean up in a few years. They’re not making the stuff any more, y’know. ---
**Author:** ![iamthewalrus\_3](https://avatars.discourse-cdn.com/v4/letter/i/258eb7/32.png) [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)\ **Post date:** [February 3, 2014, 8:14pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/36 "2014-02-03T20:14:14Z")
> [@Amateur\_Barbarian](#): > > The perception is mutual - your statement about itemizing deductions makes almost no sense, for precisely the reasons I stated. Did you not read my [post here](http://boards.straightdope.com/sdmb/showpost.php?p=17064760&postcount=13)? It explains exactly why the deductibility of home mortgage interest is relevant to this decision. ---
**Author:** ![Amateur\_Barbarian](https://avatars.discourse-cdn.com/v4/letter/a/59ef9b/32.png) [@Amateur\_Barbarian](https://boards.straightdope.com/u/Amateur_Barbarian)\ **Post date:** [February 3, 2014, 9:06pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/37 "2014-02-03T21:06:17Z")
> [@iamthewalrus\_3](#): > > Did you not read my [post here](http://boards.straightdope.com/sdmb/showpost.php?p=17064760&postcount=13)? It explains exactly why the deductibility of home mortgage interest is relevant to this decision. No, actually it doesn’t, and I refer you to post #17 in this tail chase. ---
**Author:** ![runningdude](https://avatars.discourse-cdn.com/v4/letter/r/e9c0ed/32.png) [@runningdude](https://boards.straightdope.com/u/runningdude)\ **Post date:** [February 3, 2014, 9:50pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/38 "2014-02-03T21:50:39Z")
> [@Ruken](#): > > I’m assuming you’re talking about the refund, not the return. > … I got confused too. Initially, I was thought he was speaking of a “Use” tax, which is collected in lieu of sales tax on some items such as cars… ---
**Author:** ![Amateur\_Barbarian](https://avatars.discourse-cdn.com/v4/letter/a/59ef9b/32.png) [@Amateur\_Barbarian](https://boards.straightdope.com/u/Amateur_Barbarian)\ **Post date:** [February 3, 2014, 9:57pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/39 "2014-02-03T21:57:03Z")
> [@runningdude](#): > > I got confused too. Initially, I was thought he was speaking of a “Use” tax, which is collected in lieu of sales tax on some items such as cars… Sales tax and use tax are almost exactly the same thing, except that sales tax is collected at the time of sale and use taxes are self-reported and paid at some later time. When it comes to registered purchases such as vehicles or capital equipment purchases for businesses, there’s almost no way to get around the reporting and payment the way 99% of individual out-of-state purchases do. ---
**Author:** ![iamthewalrus\_3](https://avatars.discourse-cdn.com/v4/letter/i/258eb7/32.png) [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)\ **Post date:** [February 3, 2014, 10:48pm UTC](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229/40 "2014-02-03T22:48:20Z")
> [@Amateur\_Barbarian](#): > > No, actually it doesn’t, and I refer you to post #17 in this tail chase. I just reread post #17, and I think we sort of have a philosophical difference on how best to pay down debt. So, you’re saying to pay off the truck because it will be paid off earlier, and thus free up your payment, which will give you more financial flexibility. **Ruken** and I are saying to pay off the truck first because it has a higher interest rate, and paying down the highest interest rate will minimize the total interest you pay over the life of all your debt (which, if you had great financial discipline, would lead to you paying it off sooner/having more money at the end). Neither approach is wrong. Financial flexibility is clearly worth something, so it should be factored in. However, I’d argue that the real interest rates are relevant. Certainly if the house had a much higher interest rate than the truck, it’d be worth considering paying it off first. And in order to compare the interest rates of the debt, you have to note that the mortgage interest is deductible and the truck interest is not, so the effective interest rates are different than the provided numbers. [Previous page](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229.md?page=1) [Next page](https://boards.straightdope.com/t/use-tax-return-on-home-or-car-loan/680229.md?page=3)